Oil Leaps on Hopes for Saudi-Russia Truce, U.S. Action

Date :

02/04/2020 @ 15:11

Source :

Dow Jones News

Oil Leaps on Hopes for Saudi-Russia Truce, U.S. Action

By David Hodari

Crude prices jumped Thursday on hopes for a truce in the price war between Saudi Arabia and Russia and the possibility of action from the White House to mitigate the effects of last month's vertiginous drops.

Brent crude oil, the global benchmark, rose 7.6% to $26.62 a barrel in one of its sharpest rallies of recent years. West Texas Intermediate futures, the bellwether of U.S. prices, rose 8.9% to $22.11 a barrel. Both benchmarks have shed around 60% of their value so far in 2020.

President Trump is set to meet Friday with the heads of some of the largest U.S. oil companies to discuss measures to help the industry as it fights for survival. The chief executives of Exxon Mobil Corp. and Chevron Corp. are expected to attend. Mr. Trump also said he was confident Saudi Arabia and Russia would resolve their dispute over oil output and prices in the coming days.

Russian President Vladimir Putin said Wednesday that oil producers should cooperate to mitigate the market decline, adding that Moscow is discussing the condition of the oil market with Washington and the Organization of the Petroleum Exporting Countries.

The main driver of oil's rally was "the announcement by Trump telling the world 'we've been talking with the Russians and the Saudis and he's quite proud of these oil diplomacy efforts," said Bjørnar Tonhaugen, head of oil markets at consulting firm Rystad Energy. "He's trying to save the U.S. industry from collapse."

The spat began in early March, after Saudi-led OPEC and a group of other oil-producing countries dominated by Russia failed to deepen production cuts by 1.5 million barrels.

But that amount pales in comparison with the size of the collapse in oil demand over recent months, with government-mandated lockdowns around the globe as a result of the coronavirus pandemic grounding flights and keeping citizens in their homes.

Also boosting prices were reports that China is implementing plans to buy up cheap oil to fill its strategic petroleum reserves. Beijing may also start filling its commercial stocks as well, according to Bloomberg.

The world's largest oil-consuming nation has close to one billion barrels' worth of storage space, and could take on an extra 100 million barrels over the course of this year, according to data from Rystad Energy.

"It's given some support to prices today," said Ehsan Khoman, head of Middle East and North African research and strategy at MUFG. With Saudi Aramco set to release its May official selling prices in the coming days, "the question now becomes whether this is going to mean the Chinese filling up to the brim and locking in prices for May as well as April."

Oil-market watchers were still skeptical about the impact of any end to the price war given the impact of the lockdowns on demand.

"I don't think this meeting significantly changes things, the oil market is still way out of balance and oil stocks are still rising at an unprecedented rate," said Spencer Welch, director of oil markets at IHS Markit. "Producers are going to have to involuntarily cut production because there's going to be nowhere for the oil to go."

Also attending the White House meeting will be Continental Resources Inc. CEO Harold Hamm, who has called for the Trump administration to intervene in the Saudi-Russian price war. Other shale companies have called on state regulators to enforce production cuts in Texas.

The two periods of the sharpest oil inventory builds in recent years were in early 2005 and early 2015, when stocks rose by 400 million barrels, according to IHS Markit data. But IHS expects global oil inventories to rise by three times that amount in the first half of this year.

"Nothing like this has ever happened before or hit the oil market like this and I don't think a supply cut by a couple of companies will be enough," Mr. Welch added.

Oil storage around the world is beginning to fill up, prompting some companies to enact production cuts. Brazilian state-owned giant Petrobras last week became one of the first major companies to announce such reductions.

Even with Thursday's rally, oil prices remain below the cost of production for the U.S., Canada and Russia, and strategists are forecasting further declines from here.

Crude will extend its plunge in the coming months, and Brent and WTI could sink as low as $15.80 and $13.30 a barrel, respectively, as the world's crude glut continues to build, according to Japanese bank MUFG.

The prices of some grades -- such as landlocked crudes in the U.S. and Canada subject to pipeline bottlenecks -- could even turn negative, said MUFG's Mr. Khoman.